The third quarter’s seventh straight gain for the S&P 500 did not come easy. Investors wrestled with geopolitical turmoil in Ukraine and the Middle East, and the eventual end of the Federal Reserve’s (the Fed) bond buying program. U.S. small-cap stocks were volatile and fell into negative territory, year-to-date. Economic growth in the U.S. picked up, but ongoing concerns over the strength of the economic recovery in Europe hurt foreign equity investments, which was compounded by a strengthening U.S. Dollar. Emerging Markets fared better than their Developed Market counterparts, but were still down -3.5% for the quarter. Fixed income investments did not fare much better. The 10-year Treasury fluctuated during the quarter, ending little changed at a 2.52% yield. Increased interest rate volatility meant flat returns for the Barclays U.S. Aggregate. High-yield bonds delivered negative returns as investors shunned credit risk and spreads widened. REITs were up more than 20% on the year through August, as investors continued the search for yield, but they took a step backward amid growing speculation over rising interest rates in the coming year. Commodities were dragged lower by falling oil prices. Alternative mutual funds, as a group, had weak performance during the third quarter as evidenced by the -1.5% and -0.8% returns for the Morningstar Long/ Short and Morningstar ultialternative category averages, respectively. Large-cap equities pulled away from small caps by a wide margin of outperformance in the third quarter. On a trailing one-year basis, the Russell 1000® Index was more than 15% ahead of the Russell 2000® Index. Style preference shifted as growth stocks easily outperformed value. On a year-to-date basis, large-cap growth equities are relatively in line with their value counterparts, while small-cap growth equities are slightly ahead of small-cap value.
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